A simple example shows why the theory works. Consider (hypothetically) widgets. Assume that new technologies cut widget production costs by 20%. These savings must go somewhere, and the chances are that they will be spent, thereby creating new jobs. The major candidates to receive the windfall are: (a) consumers, who could benefit from lower widget prices; (b) widget workers, whose salaries might be boosted; or (c) the shareholders of widget makers, which might raise dividends or build factories.

This logic could be thwarted if the windfall were saved and not spent.

Strictly speaking, this is not true. If the windfall were saved and not spent, that does not mean that benefits do not occur. Savings are economically productive, too. Even if 100% of the windfall were saved, that would mean there are more funds for investment: housing loans, car loans, retirement, business loans, etc. An increase in savings would help boost the economy, too.

Let’s do some thinking on the margin. Let’s say that the windfall results in $1m saved. Taking Samuelson’s argument above at face value, it’d mean that the $1m saved was a loss for the economy. However, that $1m is loaned out to a new business owner who uses it to build his building, stock his store, and, once up and running hires more workers and produces more wealth for his community and the world. The economy certainly has benefited. I would suggest the following edit to Dr. Samuelson’s paragraph (bold and italicized part is my writing):

A simple example shows why the theory works. Consider (hypothetically) widgets. Assume that new technologies cut widget production costs by 20%. These savings must go somewhere, and the chances are that they will be spent, thereby creating new jobs. The major candidates to receive the windfall are: (a) consumers, who could benefit from lower widget prices; (b) widget workers, whose salaries might be boosted; (c) the shareholders of widget makers, which might raise dividends or build factories; or (d) borrowers/investors who now have a larger pool of loanable funds from which to draw, if some of the windfall is saved.

This logic could be thwarted if the windfall were saved and not spent.

Sounds like we might have different definitions of “investment.” I would define investments as money put at risk in the attempt to increase its purchasing power.

I trust you are aware that for a number of years there have been record levels of excess bank reserves at the Fed which are earning rates so low that they are guaranteed to lose purchasing power. That doesn’t meet my definition of investment. Does that money meet your definition of “investment”? It does meet Keynes definition of hoarding savings out of fear of investment risk. Of course, as always, you are and ought to be free to “pay no attention” to the way most people talk if you like the way that’s been working for you.

Who are the “others” that excess bank reserves are “available to”? Non-Austrians are curious about this.

The economic definition of an investment, which I am using here, is the purchase of future consumption. So, let’s say I take a seed and plant it. I consume the future good (the plant) rather than the current good (the seed).

An investment needn’t earn more in the future (although, ideally, that is why you’re investing).

I don’t know what you mean by the “purchase” of future consumption. Are you defining any deferral of future consumption as investment? If I put cash in a safe deposit box for 5 years do you consider that an investment? I would consider it savings but not investment.

Here is what Tyler Cowen says in his textbook: “Savings is income that is not spent on consumption goods. Investment is the purchase of new capital, things like tools, machinery and factories…From an economic point of view investment requires a net increase in the economy’s ability to produce goods and services.”

When banks turn down both loan applications and the opportunity to buy bonds and instead choose to hold excess reserves at the Fed at rates well below inflation that IS money being saved and not spent or invested.

The effects of THAT are very different from the effects of that money being loaned out. That is the point Samuelson is making and I don’t see why anyone would think it’s controversial.

I believe you mean to point out that savings has the effect of increasing the potential for investment. That is true but it was much more the case before we had a Fed able to create fiat money at will. Austrian economics preceded that development and hasn’t caught up to its implications yet.

“Sounds like we might have different definitions of “investment.” I would define investments as money put at risk in the attempt to increase its purchasing power.”

I would too. Of course money put at low risk in hopes of slowing its loss of purchasing power has the same effect and could be considered a form of investment. Even hoarding money in a cookie jar increases its purchasing power by increasing (or slowing the decrease) of that which is left in circulation.

The word ‘investment has taken on new meanings in recent years Obama liked to claim that most federal expenditures were “investments”. I guess that sounds better. If someone wants to imply they are making good use of the money they spend, they say they are “investing” it,

Since the Fed is paying for the use of those excess reserves, we can assume they are getting some value from them, right?

Of course it pays to be careful when discussing transactions between the banks and the Fed, as money zips in and out of existence much like some quantum particles do. Perhaps the term “investment” shouldn’t be used in that context. Instead of “excess reserves” maybe a better description would be “potential money” that will come into existence if the banks decide to lend it.

Actually, Non-Austrians, especially Keynesians, are curious about a lot of things. There is a great deal of uncertainty and magic in their world. There are ‘shocks’ and ‘traps’, and ‘spirals’ and ‘animal spirits’ and other scary stuff like that used to explain things they don’t understand. Believe it or not, Keynesians actually think something called ‘aggregate demand’ drives economic growth. Yes, they really do. I wouldn’t kid you about something like that.

>—“Even hoarding money in a cookie jar increases its purchasing power by increasing (or slowing the decrease) of that which is left in circulation.”

Leaving money in the cookie jar will very slightly increase the value of OTHER money not in the cookie jar by very slightly reducing the money supply (dare I say the aggregate money supply?). It will not increase its own value except in the unlikely event of an aggregate deflation. The cookie jar money will likely see its own purchasing power reduced by whatever inflation has occurred during its time in the cookie jar.

The Fed pays on excess reserves because it believes that will help them achieve their policy goals in managing the money supply. You can call that something they value if you like but it is not a form of consumption. It actually is a tool for discouraging consumption.

People use the word investment in a number of ways and that’s fine with me as long it is clear in what sense they are using it. You seem to be using the word investment as having a meaning identical to “savings.” Are these no more than synonyms for you?

“Leaving money in the cookie jar will very slightly increase the value of OTHER money not in the cookie jar by very slightly reducing the money supply (dare I say the aggregate money supply?).

Oh sure. Aggregate is a perfectly cromulent word. Only when used with the word “demand” and the combination of the two used to suggest a relationship with economic growth is there a problem.

I know, the cookie jar comment is kind of silly, unless it’s a very large cookie jar so as to have a significant effect on the circulating money supply. Nonetheless, the point is valid, even though the practical effect on the value dollar with respect to goods and services is negligible. And of course the money in the cookie jar must appreciate or depreciate at the same rate as the circulating money because, after all, every dollar bill represents a dollar whether it has been through a number of hands and pockets or has snoozed in a cookie jar.

IF – and only if removing the cookie jar money from circulation caused the remaining money supply to increase in value or lose value at a lower rate would the cookie jar money have increased in value while doing nothing. At that point spending it would gain the cookie jar saver the benefit of the increase or lesser decrease, until the added money supply could reverse its previous effect by increasing the money supply.

“The cookie jar money will likely see its own purchasing power reduced by whatever inflation has occurred during its time in the cookie jar.”

Exactly. Unless removing the money from circulation has afected the value of the remaining dollars.

“ You seem to be using the word investment as having a meaning identical to “savings.” Are these no more than synonyms for you?”

How about this: Savings is deferred consumption. This could be production that is set aside for future consumption or invested in the sense of the word you prefer, in capital assets, perhaps at some risk, in hopes of earning a return on that investment.

We can probably agree that cookie jar money, safe deposit money, or money stacked in a storage unit a la Walter White is savings, but not investment, as long as it isn’t merely cash on hand. However such savings could easily become either consumption or investment at any time.

OK so far?

I would venture to guess that very few people who aren’t either criminals or cranks actually stash away cash in cookie jars or storage units as a form of savings, especially as held cash invariably loses value over time due to government policies, so it may not be very meaningful to discuss those types of savings. I think most people use convenient savings accounts, CDs, and money market accounts as vehicles for savings, which resources may be borrowed by others to invest or to finance consumption. There are sometimes, but not now, incentives offered to such savers in the form of interest. It wouldn’t be much of a stretch to consider these to be forms of low risk low return investments.

Are we still in agreement?

Now about reserves: AFAIK, and you are the bank guy so correct me if I’m wrong, I believe reserve requirements only apply to demand deposits, which are neither investments nor savings, but are instead cash on hand, as the funds may be withdrawn at any time without notice. If that’s the case, then your question about excess reserves is irrelevant.

My point about excess reserves at the Fed was not in regard to required reserves. It was in regard to additional reserves that banks have voluntarily chosen to hold at the Fed at rates virtually guaranteed to lose purchasing power. These reserves are “excess” precisely because they exceed whatever reserves are required. They are held there because banks don’t want to invest them. They are not being put to work to produce any good or service or even to consume anything.

Kudos on your excellent use of “cromulent.” Since I often complain that unconventional word use undermines your ability to communicate your ideas effectively to non-libertarians I feel a responsibility to acknowledge that this excellent usage conveyed your ideas well even though I still disagree with them.

It seems to me that the Austrian bafflement at the concept of aggregate demand is another instance of the same phenomenon we see when libertarians imagine that their opponents think that the will or intent of groups of people has a separate existence of its own apart from the sum of the individual intents or wills. Aggregate demand is just the sum of all the smaller units of demand (demand from individuals, companies, purchases of team shirts voted by bowling leagues etc.) in an economy. It’s just a convenient term for talking about that.

Aggregate demand can vary and aggregate supply can vary. There can be problems with either especially when they aren’t well matched to each other. You can drive off he road on either side.

Keynes’ ideas are 80 years old now and have been corrected and improved in many ways. Austrian ideas are even older and more in need of updating. You say there is “a great deal of uncertainty” in Keynesian economics. That part is true.

There is far too much certainty in Austrian economics for a discipline with so many confounding variables regarding cause and effect in policy decisions. Who can forget how certain Austrian economists were eight years ago that Fed policies were sure to cause imminent runaway inflation? Instead we saw the lowest inflation of our lifetimes. Oops!

“My point about excess reserves at the Fed was not in regard to required reserves. It was in regard to additional reserves that banks have voluntarily chosen to hold at the Fed at rates virtually guaranteed to lose purchasing power”

Yes, and if these reserves are held against potential demands from checking account owners, then they aren’t savings at all, but cash on hand. I have cash in my wallet. I have cash in checking accounts. Those funds are on hand to cover current ongoing expenses and can’t be called savings. Unless you know something about banking, which I don’t, a relatively low bar, I would consider excess reserves to be excess cash on hand and not savings at all.

Are required reserves not-savings but excess reserves savings? If there were no reserve requirements, which is the case in many countries, would reserves voluntarily (and prudently) held by banks be called savings or cash on hand?

“ These reserves are “excess” precisely because they exceed whatever reserves are required. They are held there because banks don’t want to invest them. They are not being put to work to produce any good or service or even to consume anything.</i"

Yes. They are excess cash on hand, right? Do you call everything 'savings' if it isn't immediately spent ? Is there a time limit beyond which cash on hand becomes savings? Does the intended use for money not immediately spent make a difference?

“It seems to me that the Austrian bafflement at the concept of aggregate demand is another instance of the same phenomenon we see when libertarians imagine that their opponents think that the will or intent of groups of people has a separate existence of its own apart from the sum of the individual intents or wills.”

Wait a minute. It has always been my position that the aggregate of anything – economic demand, will of the people, or political authority is nothing more than the sum of the individual demands, wills, and authorities. I seem to recall you trying to make a case for “emergent” political authority that exceeds the authority of each individual.

I don’t personally have any trouble with the concept of aggregation, and I doubt many Austrians do. It is the strange notion that aggregate demand drives economic growth that raises objections. This is similar to believing I can lift myself into the air by pulling up on my bootstraps. It is capital investment and increased productivity that drive economic growth. It isn’t spending more, it is spending less and deferring some amount of consumption to create capital that drives growth.

“Aggregate demand can vary and aggregate supply can vary. There can be problems with either especially when they aren’t well matched to each other. You can drive off he road on either side.”

That’s true. And it is the magic of the price system that corrects faulty steering and helps match supply to demand. Interfering with this system, something government policymakers are as helpless to avoid as moths are to avoid a flame, can only cause less than optimum outcomes.

“There is far too much certainty in Austrian economics for a discipline with so many confounding variables regarding cause and effect in policy decisions.”

“Policy decisions”. That’s it. You have hit the nail on the head. A free market economic system doesn’t need “policy decisions”. It is these “policy decisions” that cause less than optimum outcomes, usually due to unforeseen and unintended consequences. You criticize Austrians for failing to predict accurately, but those “confounding variables” you speak of are the result pf policy decisions and their consequences. Hard to predict what people with policy making authority and little actual knowledge of economics will do.

The inflation prediction, for example: It is uncontroversial to say that if you increase the supply of one commodity relative to every other commodity, the price of that one commodity will decrease in terms of the other commodities. Or, you could say that the price of all other commodities in terms of the one commodity will increase. If you increase the supply of money above the demand to hold money, you will eventually increase the price of every other commodity in terms of money.

Of course if you increase the supply of money hoping for higher aggregate demand to drive economic activity (a silly notion) but the money doesn’t actually circulate (excess reserves) then you haven’t really done anything, and inflation won’t occur. If those countless billions over the year actually circulated instead of going down all the various rabbit holes it actually did go down, we would have seen inflation, as nothing more was produced, so we would have had more dollars chasing the same amount of goods and services. Only increased production from capital investment can justify an increase in money supply, which must follow, not precede that increased production.

Emergent and aggregate are not synonyms. Not all aggregation causes emergent phenomena but all emergent phenomena require some aggregation.

>—” It isn’t spending more, it is spending less and deferring some amount of consumption to create capital that drives growth.”

It isn’t the SOURCE of the money for new capital investment that matters for driving growth. It is whether that money is used for making productive investments or unproductive investments.

Money carefully saved for years and invested badly will have bad economic effects. New fiat money created out of thin air will have good economic effects if put into productive investments and bad economic effects if put into unproductive investments.

It is the quality of the investment, not the source of the investment money that makes the difference.

>—” I would consider excess reserves to be excess cash on hand and not savings at all.”

Try thinking about this as existing on a spectrum rather than suddenly changing its nature at some arbitrary point. Russ Roberts was once talking about the various controversies on what financial instruments should be counted as part of the money supply. He captured this concept beautifully by describing one financial instrument as more “moneyish” than the other. Can we agree that some forms of savings are a lot more “investmentish” than others?

So then, there are times when the economy is growing strongly and banks find it easy to lend all the money they can prudently or legally lend. Then there are other times when what we might (for lack of a better term) call animal spirits are lower and banks can’t find nearly enough credit worthy borrowers to put out all the money they would like to lend. These two situations are very different. Money that is saved and then invested has very different effects from money that is saved but not really put to productive use.

What is regarded as prudently “loanable funds” is very subject to the changeable psychology of lenders and borrowers.

>—“A free market economic system doesn’t need “policy decisions”

So you say but why then have we never seen anything like a capitalist economy in the absence of central government? And even a decision that government shouldn’t intervene, or that there should be no central government is a collective policy decision.

>—“…an increase in money supply, which must follow, not precede that increased production.

That’s not the way it worked in The Great Depression. The nations that came off the gold standard and inflated their currencies found that recovery began almost immediately afterwards and in the order that they changed that policy. Likewise in the Great Recession the increase in the money supply preceded the recovery.

Emergent and aggregate are not synonyms. Not all aggregation causes emergent phenomena but all emergent phenomena require some aggregation.”

No, they are not synonyms, and none of the aggregations we have discussed so far on this thread lead to emergence.

“It isn’t the SOURCE of the money for new capital investment that matters for driving growth. It is whether that money is used for making productive investments or unproductive investments.”

This may be the crux of our disagreement. Let’s define “money”. Money is a stand in for actual goods and services – a medium of exchange. To be useful, money must represent the production of some good or service. If I work all day for my employer I have produced something of value for him, for which he will give me food, shelter, clothing, etc. well, actually he doesn’t have those things, so he will give me certificates representing the value of my labor, and I will exchange them with someone else for the things I actually want.

If I just print up these certificates in my garage, there will not be the additional production created for my employer, and no increase in economic activity as a result, and eventually people will discover that there are more certificates in circulation but not more goods and services to spend them on, so prices will rise. The Fed and banking system counterfeiting money has exactly the same effect. The billions of fiat dollars created out of thin air since the great recession haven’t circulated which means either that the policymakers were wrong about the actual demand for money, or they were have intentionally kept it from circulating. Wrong in either case. Why do you trust them to manage an economy they don’t even understand?

“Money carefully saved for years and invested badly will have bad economic effects. New fiat money created out of thin air will have good economic effects if put into productive investments and bad economic effects if put into unproductive investments.”

No it won’t. New fiat money will have bad economic effects in either case, as no new goods and services have been produced to be represented by the new money. If people start buying more widgets from me using counterfeit money and I invest in capital equipment to handle the anticipated higher demand I will soon find that the higher demand I anticipated isn’t really there. Production before consumption – always. You can’t continue to consume what hasn’t been produced using counterfeit money for very long.

Oh yeah. Your Rothbardian ideas about fractional reserve banking are a bizarre outlier even among self-described libertarians. As for the rest of the population, these ideas are so rarely taken seriously by even professional economists and bankers that most people have never heard of them.

>—” The Fed and banking system counterfeiting money has exactly the same effect.”

No. They don’t even have the same effect on YOUR behavior never mind the larger economy. If someone offers you a dollar you know they printed themselves you will not treat it the same way as a dollar you know was printed at the Fed.

>—“The billions of fiat dollars created out of thin air since the great recession haven’t circulated which means either that the policymakers were wrong about the actual demand for money, or they were have intentionally kept it from circulating.”

False dichotomy. The financial crash destroyed vast amounts of money that had been created in the Shadow Banking System. I trust you know (and are horrified by the fact) that most money today is digital, not coin or paper and ink or (swoon) gold. In the Great Depression, the destruction of money happened at the retail level. In 2008 it happened at the wholesale level. Vast amounts of money in the Shadow Banking System are used to collateralize lending and capitalize the financial system. The Fed was effectively replacing mostly that money, not money that was buying consumer goods despite the fact that money is fungible in principle.

>—“New fiat money will have bad economic effects in either case, as no new goods and services have been produced to be represented by the new money.”

You sound like somebody defending homeopathy explaining that the diluted substance retains some “vibration” from before the dilution. Regardless of whether or not you approve of how the US Dollars in your wallet were created by the Fed, they all have the same effect. Different ones don’t have different effects.

>—” Why do you trust them to manage an economy they don’t even understand?”

Good question and it has a good answer. Even though there is a lot they still don’t understand, there is a lot they have learned. At lot of it was learned from Milton Friedman. The relationship between the aggregate money supply and inflation and deflation is much better understood now.

Monetary policy is the area that divides right and left and libertarians and non-libertarians in the biggest variety of ways right now. Many libertarian economists want looser monetary policy. They like it because it is a way to manage the economy without adding to the Federal debt in the way that fiscal policy does. And because it tends to put new money in the hands of the investor class rather than the lower classes through a fiscal policy of redistribution.

We had a long period in American history between the closing of the Second Bank of the U.S. and the establishment of the Fed when most money creation was left to the markets. That was a period filled with regular depressions and financial panics despite the kind of steady growth that only the Industrial Revolution could deliver. During that period we had a monetary policy much more like what you want than we have today. We haven’t seen a single financial depression in a our entire lifetimes of the type that were routine during that period. That’s why I think this is better.

That’s not an argument. Appeals to popularity won’t work here. You’re better than this, Greg.

“No. They don’t even have the same effect on YOUR behavior never mind the larger economy. If someone offers you a dollar you know they printed themselves you will not treat it the same way as a dollar you know was printed at the Fed.”

I wouldn’t KNOW that they printed it themselves. That’s why counterfeiting is even a thing. If a dollar looks like a dollar, then we trust that it’s a dollar, and we treat it as a dollar.

You seem to be ignoring the fact that money is a commodity like any other, and that its price ultimately reflects its relative scarcity compared to other commodities, and the supply of it relative to demand.

As with wheat or other commodities, policy makers can play games with it as they do with, say, wheat by buying up excess to keep the price high, but incentives, and thus the market is adversely affected.

“The relationship between the aggregate money supply and inflation and deflation is much better understood now. ”

For example …? Basics are clearly understood. What’s been learned from past mistakes?

“ Many libertarian economists want looser monetary policy.i”

Assuming you have your finger on the pulse of “many libertarians”, I will point out that “many libertarians” don’t appear to want centrally planned policy of any kind.

“They like it because it is a way to manage the economy without adding to the Federal debt in the way that fiscal policy does. And because it tends to put new money in the hands of the investor class rather than the lower classes through a fiscal policy of redistribution.”

Then I’m confused. I thought monetary policy since the Great Recession was intended to encourage the “lower classes” to spend more in order to boost aggregate demand, Have I misunderstood? Encouraging the “investor class” is a supply-sider’s wet dream, and is a refutation of the notion that economic growth is driven by aggregate demand.

“We had a long period in American history …,”

Yes we did. It was a period of the greater economic growth and increased prosperity than ever seen either before or since. If your claim is that the industrial revolution is the primary cause, despite free market money madness, then I suppose you will claim that the industrial revolution has lost steam, and now offers only anemic growth despite expert money supply management by those-who-know-best. I’ll have to respectfully (or not) disagree. It’s my impression that the rate of technological advance is and has been exponential. So what’s slowing down economic growth these days?

During that golden age there were recessions/depressions that were mostly sharp and short, and which were recovered by the market adjusting itself quickly, as it tends to do when allowed. Now with the Fed, there was of course the Great depression which was really two depressions and was exacerbate by fumbley-handed interventions that caused it to drag on until after the 2nd World War.

Since then we have had milder recessions with long recoveries and of course the great recession which lasted … how long? are we fully recovered yet? If as you say the Fed has learned a lot in the the last 80 years, where is the evidence?

Several times on CD I’ve seen you dismiss other commenters by telling them that they can’t expect to have their ideas taken seriously on an economics blog. If it’s OK for you to point out that someone’s ideas won’t be taken seriously by the motley assortment of commenters on a relatively obscure economics blog then It ought to be OK for me to point out which ideas aren’t taken seriously by professional economists and bankers. Best not to advance a standard you can’t meet yourself. It’s not like we haven’t already exchanged our arguments on this several times. I’m not saying your ideas on banking are wrong because they are unpopular. I’m saying they are wrong AND they are unpopular.

>—“I wouldn’t KNOW that they printed it themselves.”

Sometimes you would and sometimes you wouldn’t. Counterfeits come in a wide variety of qualities. I’ve seen ones printed on ordinary copy machines. My point is that anytime you DID know a bill was a real counterfeit, you would treat it very differently from one you knew was printed by the Fed but like to also call counterfeit.

>—” Have I misunderstood? Encouraging the “investor class” is a supply-sider’s wet dream, and is a refutation of the notion that economic growth is driven by aggregate demand.”

Yes, you have misunderstood. Market monetarists, even libertarian ones like Scott Sumner, believe that aggregate demand can be effectively managed by nominal GDP targeting. They are opposed to redistribution through fiscal policy as a way to manage economic growth.

>—” I suppose you will claim that the industrial revolution has lost steam, and now offers only anemic growth despite expert money supply management ”

You should read Robert Gordon’s “The Rise and Fall of American Growth” if you find this so far fetched. He makes a very convincing and exhaustively documented case that growth peaked around 1970 and that he innovations since then don’t compare with the ones before in economic significance or their effect on daily life. Tyler Cowen calls it “The Great Stagnation.” If you care about arguing against these ideas you are going to have to be more aware of them.

Your version of the history between the Second Bank and the Fed is way off. You are usually much better informed than this. According to Wikipedia there were 19 recessions or depressions in that period with greater drops in business activity than we have seen anytime in our lifetimes. Usually much, much greater. As for duration 10 were longer than the Great Recession.

“Several times on CD I’ve seen you dismiss other commenters by telling them that they can’t expect to have their ideas taken seriously on an economics blog. ”

Fair enough, but it’s still not an argument, whether you use it or I use it. 🙂 In my own defense, I generally use that insult in exasperation when people appear to have no concept of economics at all, and no idea what they are talking about. Sometimes these are folks who seem to believe they can jump into the middle of an econ conversation as if the economics being discussed had just been invented, and that their 2 cents worth is as valid as anyone else’s.

You, on the other hand, are disparaging an entire school of economic thought that has significant support, and the validity of which isn’t determined by popular opinion.

“Sometimes you would and sometimes you wouldn’t. Counterfeits come in a wide variety of qualities. ”

But that’s beside the point. As you wrote, and as I’m well aware, money isn’t limited to paper certificates. I use the term “printing money” to convey a sense of falsehood and cheating. None of our money is backed by anything more than “It’s money because I say it is.” Our belief that it will be accepted by others in exchange for goods and services when we present it as payment is what makes it work, regardless of the form in which it is offered, e.g. cash, checks, electronic transfers.

You’re right that I wouldn’t accept a form of money that appeared to be home made, but all money created at the Fed looks the same whether or not it was just ‘printed”, that is, created out of thin air in excess of the aggregate demand for money. Manipulating the price of money is no different than manipulating the price of any other commodity through price controls. It causes loss of information ordinarily provided by the price signal.

And that’s the problem with market monetarists, including Sumner. Being a libertarian, it seems that he is either spot-on on an issue, or way out in the weeds due to his monetarist leanings. The idea that some group of really, really smart people can successfully plan in the best interest of 320 million people, better than they can plan for themselves, is just mind boggling. It’s arrogance on stilts. Beware macro; beware thing in aggregates.

“You should read Robert Gordon’s “The Rise and Fall of American Growth” ”

Thanks for the reference, I will. It is my current belief, prior to reading Gordon, that rapid growth in prosperity and well-being have occurred in the last several decades in ways that aren’t easily measurable in dollars, and therefore in GDP growth. I, for one, wouldn’t return to the ’60s or ’70s for higher GDP growth, as I’m much better off now.

“ If you care about arguing against these ideas you are going to have to be more aware of them.”

You’re absolutely right. I’m planning on completing that reading assignment next week on vacation – along with the other 400 articles and books I’ve not yet read that are waiting on my tablet. (well, maybe I’ll read one or two)

Now there’s a good example: How would a person acquire and read 400 articles and books in the ’70s? I have acquired all of them without getting up out of my chair. Most are/were available at no cost, and I can easily carry all of them with me, anywhere I go. Additionally, I can read them on a number of other electronic devices besides my tablet as they actually reside on a micro SD card the size of my little fingernail, which can be removed from the tablet and reinserted into any other device that accepts external storage (see note 1). I no longer make frequent trips to my local library, in fact I don’t think I’ve been there in 5 or 6 years. How would these improvement, especially the savings of my time, show up in GDP?

I agree that the internet, for example, is not nearly as important as electricity and the automobile in terms of improved human well being, but it allows us to do a lot of things much more quickly and easily than we did in the past. How is that greater amount of time for alternate uses measured in GDP?

“Your version of the history between the Second Bank and the Fed is way off. You are usually much better informed than this. According to Wikipedia there were 19 recessions or depressions in that period with greater drops in business activity than we have seen anytime in our lifetimes. Usually much, much greater. As for duration 10 were longer than the Great Recession.”

Well, that’s Wikipedia for you. Actually, I am better informed than that, and I will try to dig up some of the more credible sources I have read that tell a somewhat different story if you wish to pursue this topic.

(note 1) Here we see just one of thousands of examples of emergent standardization in the market without any government involvement.

>—“You, on the other hand, are disparaging an entire school of economic thought that has significant support, and the validity of which isn’t determined by popular opinion.”

Hey, I kid the Austrians because I care. The opposite of love isn’t hate, it’s indifference.

I, on the other hand take a lot more interest in Austrian Economics than most people because there are some things I really like about it. But some friendly advise: Don’t lead by focusing attention on its level of support. That’s really not the strong point.

I think almost all schools of economics make some very good points and almost all put too much confidence in their central dogma. I think Hayek was one of the greatest economists of all time and I think The Constitution of Liberty is one of the great books of all time. It’s too late in the day now for me to tell the story of how I became a Hayek fan but I’ll try to remember to get to it tomorrow because I think you and Jon would both enjoy it. Hayek was the best ever on explaining how market prices efficiently put to work decentralized economic knowledge. And he was the first to realize that complex emergent systems like economies are not predictable beyond the very short term. It was an intuition for him but it was a correct intuition. Later it was explained by others that sensitive dependence on initial conditions was the reason why.

Hayek wasn’t right about everything though and, like most Austrians, he was hopeless on money and banking. I will say though that one of the great contributions of Austrian Economics was realizing that credit bubbles can drive the business cycle. And not in the good way. Minsky gave the best explanation of how that really works and, even though he was a Keynesian, his account is remarkably compatible with the Austrians. Tyler Cowen has pointed this out. Minsky showed how the psychology of a credit bubble works and how it’s more about psychology than interest rates. You can always tell a post hoc story about how the Fed failed to drive interest rates high enough so they should be blamed but there were plenty of credit bubbles before there was a Fed.

And another reason I care about the Austrians is that I’m a huge Russ Roberts fan even though I disagree with him on plenty of stuff.

>—-“Our belief that it will be accepted by others in exchange for goods and services when we present it as payment is what makes it work, regardless of the form in which it is offered, e.g. cash, checks, electronic transfers.”

This is equally true of gold. If you haven’t read Milton Friedman’s “The Island of Stone Money” do so right away. It’s about four pages long and one of the most brilliant essays on economics ever written.

>—-“How is that greater amount of time for alternate uses measured in GDP?

It’s not but people expect more than some extra time out of their economic growth apparently.

>—” Here we see just one of thousands of examples of emergent standardization in the market without any government involvement.”

I agree. Rest easy. I am not advocating any government intervention at all regarding Wikipedia.

OK, now for that story of how I came to love Hayek and have a strange affection for Austrian economists.

I went to High School at the peak of the cold war in an affluent suburban neighborhood. I took Russian from 7th to 12th grade. I learned remarkably little of the language but I learned a lot from the trip our Russian classes took to the Soviet Union on Spring Break in 1968 days after Martin Luther King was assassinated.

We went over there thinking we would describe what it was like in America to Russian kids and they would want to come home with us when we left. We found out two things very quickly. First, that they were to offer to us much better hospitality than Russians would have received visiting the U.S. Secondly, that they were much better than we were at defending their political and economic system.

Recall that 1968 was just about the high water mark for Soviet influence in the world and a particularly bad time for the U.S. with Viet Nam, summers filled with urban riots and they assassination of MLK right before our trip and RFK soon after.

They were very eager to make a positive impression and filled with pride at their system They put us together with the brightest Russian kids our age. These were very bright and well indoctrinated children of party members who spoke perfect English, (Which was a good thing because our Russian was terrible.) When we suggested playing a pickup basketball game we found ourselves playing the Leningrad High School city champs. They were real athletes all at least a foot taller than any of us and none of us were good athletes to start with. We got tickets to the Bolshoi Ballet that ordinary Russians would have had little shot at.

When we started talking economics, they pointed out that in two generations they had gone from a preindustrial third world economic backwater to the second most powerful nation in human history and they had done it while doing most of the heavy lifting fighting the Nazis. They claimed that the fact that they had understandably made that a priority was the reason their stores were empty of consumer goods. They pointed out that their streets were safe and clean while no one thought it was safe to wander around most American cities at the time. They asked what the hell we were doing in Viet Nam and why MLK was murdered.

They claimed their system was much more efficient than ours because they didn’t waste vast amounts of money advertising trivial differences between brands of things like soda and cigarettes and duplicating managements in companies doing the same thing.

We knew they were wrong but we didn’t know why. I resolved then to learn how to defend the values that meant the most to me and I realized then that the only way to do that was to familiarize myself with the very best arguments against those things. I see that same burning desire to get better at defending your values in you and Jon and I think that is the reason we get along so well. It is vanishingly rare on internet comment boards to find commenters who want to stay in an argument and continue to argue in good faith when the other guy is scoring.

So gradually I came to understand the importance of competition and market prices to economic efficiency but I was never satisfied with how to explain WHY they are important until I read Hayek. No one has ever done that better than he did and I have a special interest in Austrian economics because of it even though I find a lot to criticize in parts of Austrian economics. I criticize it because I care about it. Many commenters take that as hostility but it isn’t intended that way. Friends try to stop friends from making mistakes that are hurting them.

When I discovered Russ Roberts, EconTalk, and the Keynes Hayek rap videos that really sealed my interest in what the Austrians were saying. And my desire to correct their mistakes.

As I reread the part my last comment about how rare it is for most internet commenters to be interested in really being effectively challenged, It occurs to me how ironic it is that free market advocates in general (present company excepted) are just as prone to this vice as anyone else.

Competition is just as important in ideological debates as it is in free market economies. And for the same reason. It drives out the those who can’t perform and rewards those who can.

Some people want a blog with a strong point of view to just be their internet happy place where they can go to hear only stuff they agree with. They take any disagreement to be a form of hostility. You, Jon and I favor the competitive model.

Greg G. Thanks for your comments. I think you and I agree on a great deal. I can’t respond right now because I’m heading out for vacation with grandchildren. I will get back to you in the next day or two.